How can I maximize a 401(k) I started later in my career?
I am 66 years old and I started a 401(k) last year. My annual salary is $51,000 a year, and my employee matches up to 6% of my salary (fifty cents on every dollar). I have 20% of my salary going to the 401(k). I am planning on retiring when I am 72 years old. What can I do to maximize and get the most out of my 401(k) or should I change to a Roth 401(k)? I don't understand some the verbiage of the 401(k) plans. What is the best plan for me and my savings over the next six years before I retire? I am about to collect full Social Security in August 2017.
Behind the Eight-Ball. Maximizing your 401(k) at this stage will be tough, but there are mechanisms you can and should engage in. Starting this late in your life makes Compound Interest (which Einstein called the 'Eighth Wonder of the World') less effective. However, you still have your company match, and that is likely going to be the most beneficial part of your 401(k) plan. Put as much into your 401(k) as you can but certainly consider putting in the amount that allows you to take full advantage of your company match (sounds like you already are - excellent). Now - let's talk about your Social Security claiming strategy. Your Social Security is likely a much more important part of your question and comment above. Sounds like you are going to have limited means when you retire and my suggestion about claiming your Social Security Benefits (SSB) in August is simple - DON'T. Don't claim your SSB this early. Obviously, there are extenuating circumstances that might make cause you to need that money today, but your SSB is going to be an incredibly large part of your retirement income. Allowing your SSB to continue to compound over the next several years while earning 'Late Retirement Credits' through Social Security, will provide you with more income when you finally retire (the amount you will earn from Social Security will continue to increase until you are 70). Consider the fact that you're currently earning an income from your employer and your income will also cause your Social Security Benefits to be taxed at a higher rate suggests that you should wait to claim your SSB's until you are much closer to retirement (possibly as late as 70).
- Do NOT take Social Security in August. Wait until you're 70 to get more. No brainer if you're working.
- You don't have time to "do" anything to maximize the 401k. Don't try. Keep it conservative.
If this is all the investment money you have, you may want to purchase an immediate annuity with it when you retire. Hopefully that and the increased SS payment at age 70 will be enough.
Otherwise look for other income sources. Like AirBnb part of your home.
Hope that helps!
Thank you for your question. The one thing that you don't want to do is get to risky with your nest egg as you try to catch up for lost time. With that being said contributing as much as you can each year and staying within your risk profile is a good place to start. My best advice is to speak to a financial advisor who can help guide you based on your individual needs.
One of the biggest mistakes I see investors make is getting too risky because they feel the need to "catch up". Just because you "need" a higher return to catch up does not mean the market will co-operate! More risk always means a higher chance of not meeting your objectives.
Stick with a balanced approach to your portfolio. At FundTraderPro.com we help clients manage risk by following holdings closely and performing a regular evaluation of holdings. If you're not that active in your approach then a Target Date Fund that coincides with your retirement date is a good option. You can choose a more aggressive fund, maybe a large Company Growth Fund for your contributions and company match. If the market does dip you will be accumulating shares at a lower price taking advantage of dollar cost averaging - here is a good article from Investopedihttp://www.investopedia.com/articles/01/090501.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186a
If you have to catch up, this implies that you are expecting your income to be lower in retirement then it is now. If that is the case, take advantage of the tax deferral of regular 401k contributions, and pay taxes later at a lower tax rate instead of using a Roth option.
Thank you for submitting. There are a number of things to unwrap in your question. First, congratulations on having 20% of your salary go into your 401k. That is an excellent step for you in building your nest egg.
It is somewhat difficult to answer your questions without knowing more information. Do you need to work to age 72 to be financially secure in retirement? If I go off of that assumption, my next question is why you would begin collecting Social Security this year. If you are concerned about having enough for retirement, I would strongly encourage you to look into how much more your Social Security would grow if you defer it until 70 or at least closer to age 70.
Finally, the choice between traditional 401k and Roth 401k is very personal. In my opinion, the biggest determining factor would be what you believe your taxable income would be after you retire. If you plan to live on Social Security and a small amount of income coming out of your 401k each year, then the traditional 401k is probably fine. This is because you should be in a relatively low tax bracket. However, if you have other sources of taxable retirement income that are not mentioned in this question, then the Roth 401k could make more sense.
I hope that helps and best of luck!